Political Risk Analysis: where International Relations meet Business

Would the knowledge acquired during the International Relations studies matter in the business world? Could the capacity to predict future trends in international politics be of value for companies interested in investment and profit? The answer is – yes. Any bank or international company these days needs political risk analysis – an analysis of what can happen in a country’s politics or at the global level that could have an impact on profits.

In the contemporary world interdependency of different political factors has increased and made the politics much more complex to follow and comprehend. The speed of political change and the frequency of it have risen, whereas the predictability of future events has decreased. The international business faces an increased exposure to civil violence and terrorism and it is challenged with confusing interstate relations. Any company interested in presence on the international market needs to be wary of sensitivity related to environmental concerns, human rights and economic justice. Company’s negligence to any of those factors can be detrimental to its investment and reputation and consequently to the whole enterprise.

At the same time globalization enables and compels international business to seek investment opportunities in developing countries in order to maintain growth and competitive advantage. It has been observed that there are very high growth opportunities in emerging markets, provided an investor can understand and manage the risk. Therefore, there is a growing demand of the business world for political risk analysis, which would provide knowledge and assessment of potential harm to business operations arising from political behavior in different countries.

Political risk assessment

The field of political risk assessment and analysis has its beginnings in 1970s, when the political risk analysis company – the Business Environment Risk Intelligence (BERI) – offered the first political risk assessment for investors. Later the Political Risk Services Group (PRS) and the Economist followed, offering the political and country risk analysis based on developed methodologies. Since then the number of companies offering political risk assessment and analysis has been steadily growing. Furthermore, the international corporations and banks not only rely on the services of political risk analysis companies but also employ their own political risk analysts.

Each of the companies specialising in political risk performs systematic analysis of countries’ politics, based on identified political variables such as: government popularity and legitimacy, ethnic, religious and racial tensions, and level of corruption. The variables are weighted for their importance and summed up to give a comprehensive overview of country’s political landscape. Such assessment is a base for predictions of future trends and developments, which are to reply to the key business question: what potential harm can the investment be exposed to in a given country. One of the key challenges to international business and political risk analysis is to detect, out of the almost indefinite number of imaginable trends within the international system, those that demonstrate a certain probability of actual prevalence.

Political Risk Analysis Systematic analysis of countries

Political Risk Analysis is essentially the capacity of employing the International Relations knowledge to analyse the world politics from the business perspective and foretell future political developments that could be potentially harmful for investment. It is to apply your expertise acquired during the International Relations studies to find ways and approaches to detect upcoming political issues in a timely manner and to assess future threats adequately, so that investors could maximize their growth in emerging markets, avoiding at the same time possible political risks which could affect their businesses.

Author: Daria Paprocka